Risk Off! For Now

The sound money community woke up this morning to a world finally behaving rationally — which is to say cowering in abject terror at the prospect of insane levels of debt, criminal incompetence at most major governments and geopolitical turmoil on a scale not seen since Vietnam, if not WWII.

Stocks are plunging everywhere (with the Chinese market closed because of instability), gold is surging, and the “buy the dip” voices in the mainstream media are vacillating between bemusement and panic.

(BBC) – A number of Saudi Arabia’s allies have joined diplomatic action against Iran after the Saudi embassy in Tehran was attacked amid a row over the execution of a Shia Muslim cleric.

Bahrain and Sudan have both severed relations with Iran, and the UAE has downgraded its diplomatic team.

Saudi Arabia on Sunday severed ties and gave Iran’s diplomats two days to go.
Bahrain, which is ruled by a Sunni monarchy but has a majority Shia population, on Monday gave Iranian diplomats 48 hours to leave the country.

It accused Iran of “increasing, flagrant and dangerous meddling” in the internal affairs of Gulf and Arab states. It said the attack on the Saudi embassy was part of a “very dangerous pattern of sectarian policies that should be confronted… to preserve security and stability in the entire region”.

Bahrain, which hosts the US Navy’s 5th Fleet, has frequently accused Iran of fomenting unrest in the country since 2011 – a charge Tehran denies.

A Sudan foreign ministry statement read: “In response to the barbaric attacks on the Saudi Arabian embassy in Tehran and its consulate in Mashhad… Sudan announces the immediate severing of ties with the Islamic Republic of Iran.”

(MarketWatch) – U.S. manufacturers have been hurt by a strong dollar and weaker foreign demand.

The business of American manufacturers contracted in December for the second straight month as heavy industry ended 2015 on a sour note, a survey of executives found.

The Institute for Supply Management said its manufacturing index slipped to 48.2% last month from 48.6% in November. Economists surveyed by MarketWatch had predicted the gauge would rise to 49.1%.

Readings under 50% indicate more companies are shrinking instead of expanding. The ISM index has posted sub-50% readings for two straight months for the first time during an economic recovery that began in July 2009.

(Zero Hedge) – Markets have started 2016 with a healthy dose of turmoil, and so many were wondering how long – and who – would be the first central bank to intervene in either directly or verbally in markets.

Moments ago we go the answer when Sweden’s Riksbank announced it has held an extraordinary monetary policy meeting in which it took the decision required to be able to “instantly intervene on the foreign exchange market if necessary, as a complementary monetary policy measure, to safeguard the rise in inflation.”

This is what else it said:
“The decision involves the Executive Board entrusting to the Governor, together with the First Deputy Governor, the task of deciding the details with regard to possible interventions.

During 2015, the Riksbank has cut the repo rate to –0.35 per cent, adjusted the repo-rate path downwards and purchased large amounts of government bonds and also announced additional purchases during the first half of 2016. However, since the last monetary policy meeting in mid-December, the Swedish krona has appreciated against most other currencies. If this development were to continue, it could jeopardize the ongoing upturn in inflation.

The Riksbank still maintains a high level of preparedness to take other monetary policy measures in addition to the currency interventions if this is necessary for inflation to stabilize around 2 per cent. The repo rate could be cut further, the securities purchases could be extended and the Riksbank could lend money to companies via the banks.”

The Swedish central bank story is of course the big one, because it illustrates the likely response of the Fed, ECB and BoJ if the world has a couple more days like today.

So one of two things will happen in the coming week: Either traders assume that the Greenspan/Bernanke/Yellen put is still in place and start buying in anticipation of another dose of hyper-easy money, or the Fed and its peers provide the dose.

Then comes the real test. Do the markets melt up the way they have after each of the past dozen or so central bank interventions, or do they finally recognize these interventions as a sign of weakness and respond with an even more pronounced flight to safety and away from risk?

Eventually we’ll get the latter. Whether this is that time remains to be seen.